A cap rate (capitalization rate) is a term in commercial real estate thatrefers to the way a building is evaluated. It’s calculated by taking the net operating income, NOI, and dividing it by the cost of the building in order to give the rate of return. Capitalization rate = Net operating income / Cost of the building
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What is cap rate in commercial real estate?
Cap rate, or capitalization rate, is the ratio of a property net income to its purchase price. It an essential number for gauging a property rental income potential.
Is cap rate a good measure of a property value?
Although cap rate gives a good idea of a property theoretical return on investment, it should be used in conjunction with other metrics such as the gross rent multiplier, among many others. Therefore, other metrics should be used in conjunction with the capitalization rate to gauge the attractiveness of a real estate opportunity.
What is capitalization rate in real estate?
Capitalization rate is calculated by dividing a property’s net operating income by the current market value. This ratio, expressed as a percentage, is an estimation for an investor’s potential return on a real estate investment.
What is cap rate (REIT)?
What is Cap Rate (REIT)? Cap rate is a financial metric that is used by real estate investors to analyze real estate investments, and determine their potential rate of return. Rate of Return The Rate of Return (ROR) is the gain or loss of an investment over a period of time copmared to the initial cost of the investment expressed as a percentage.